Nicole Holdaway sat perplexed. As director of supply chainoperations at Best Inc, she was responsible for making sure theright product was on the shelf for customers to buy. She was to doso at the lowest possible inventory costs. Until recently, she hadfelt pretty good about Best's ability to manage theinventory–service trade-off. After all, the company had investedmillions in information technology to help managers track inventoryfrom point of sale back to key suppliers' distribution centers. Butafter a 3-month study of inventory data accuracy, Nicole knewBest's inventory data wasn't accurate. Dramatic improvements wereneeded. The question was, "If technology investments hadn'timproved inventory accuracy, what would?"
The History of Bar-Code Technology
Nicole couldn't help but think back to her high school days inthe late 1970s when she worked as a grocery cashier. Back then cashregisters were a place to store money. The idea of bar codes anddatabases had been completely foreign to her. Ringing up acustomer's sale was a laborious task that depended on prices beingclearly stamped on each item. Smeared prices required a price checkthat could cause long lines—and frustrated customers at thecheck-out.
Bar codes and scanners changed everything. Nicole thought itinteresting to recall that the first retail bar-code transactionactually took place before she started working as a cashier. OnJune 26, 1974, a checkout clerk at a Marsh supermarket in Troy,Ohio, made history as she slid a pack of Juicy Fruit gum over abar-code scanner. Despite expectations, the use of bar codes didn'ttake off. Instead, bar-code adoption was so anemic that in 1976BusinessWeek published an article titled, "The Supermarket ScannerThat Failed." However, by the early 1980s mass merchandisers led byK-Mart were adopting the technology. Retail practice was foreverchanged. Nicole smiled as she wondered if history would repeatitself with RFID technology.
Inventory Accuracy at Best Inc.
Knowing what she knew about the revolutionary success ofbar-code technology, Nicole couldn't help but rely on the inventorydata provided by Best's information system. Bar codes hadtransformed industry practice, seemingly allowing stores to trackthe flow of goods and automatically place precise replenishmentorders. Further, suppliers could now use point-of-sales informationto synchronize production schedules to real-time customerpurchases. In theory, inventory could be reduced without reducingservice levels. But at Best Inc. the theory had broken down, andNicole needed to find out why.
Questions regarding Best's inventory accuracy arose when adisgruntled customer had written a letter to Best's VP ofmarketing, Kristine Thomson. The letter's tone riveted Kristine'sattention.
Dear Ms. Thomson:
I've been a loyal customer for over a decade, but I am sofrustrated that I doubt I'll ever shop at Best again. Responding toan online promotion, I visited your local store to buy anelectronic keyboard. After 10 minutes of searching, I asked a clerkfor help. Since the product wasn't on the self, he checked thecomputer, which said the item was in stock. After another 30minutes spent in fruitless search, the clerk promised to track theproduct down, get it on the shelf, and give me a call. He nevercalled!
I stopped by the store on two other occasions during the week.The product was not on the shelf and your clerks could not find itanywhere in the store. Why do you make promises you can't fulfill?For the last several years, I have spent over $4,000 a year atBest. But no more! I'll take my business and your profits to yourcompetition from now on.
Regards,
Tamara Masters
Kristine had promptly called Nicole, asking her to look into thesituation and report back within the week.
Nicole had quickly looked up the inventory status of the missingkeyboard and found that 42 units were recorded as in stock. Shethen called the store manager, asking him to do a thorough physicalcount of the item. None were found. This finding led Nicole tobring in an outside consultant to help perform a physical count atall of Best's retail stores. Amazingly, the physical audit showedthat the actual inventory matched the computer records only 35% ofthe time—and the disparities weren't all small.
Before the physical audit, managers at Best had thought theirsystems were achieving 99 percent inventory accuracy. Analysis ofthe disparities suggested that the profit implications weredramatic. Excess inventory and lost sales probably reduced Best'sprofits by between 10 and 20%.
Nicole dug deeper, discovering a secondary problem—the phantomstockout. Many items reported as out of stock at the service deskwere found someplace in the store, either in the wrong place on thesales floor or lost in the back room. Nobody knew for sure how manycustomers had left the store empty-handed and perhaps mad becausethey couldn't find what they were looking for.
Finally, adding insult to injury, before a new retail locationwas opened, a physical audit was performed. Even before thecustomers entered the store for the first time, the computerizedinventory system had the wrong quantities for one in three SKUs.The average discrepancy was an unbelievable 25%.
Now that Nicole understood the magnitude of the problem, shewondered what her next steps should be.
Questions
What are the sources of the data inaccuracies at Best Inc.?
What changes does Nicole Holdaway need to implement to eliminatethe data inaccuracies? Where should she start?
Is RFID the answer?
